practice management feb 2013

Practice

Management

GP Forum – 28 February 2013

Luke Bennett & Stuart Cowen

www.francisclark.co.uk

Programme

11.30 Profit maximisation in times of income constraint

12.30 Lunch

1.30 The NHS Pension Scheme – impact of current changes on

GPs and practice staff

2.30 Tax planning to minimise liability under new higher tax rates

and reduced allowances


Speakers

Luke Bennett – Truro office

[email protected]

Stuart Cowen – Plymouth office

[email protected]

mailto:[email protected]


Profit Maximisation in Times of

Income Constraint

• Changes in funding 2013/14

• Controlling expenses

• Profit forecasting

• Managing drawings and cash flow


“Times of Income Constraint”

- A Crystal Ball

• Backdrop of “austerity measures”

• Public and government reactions to bankers’ bonuses

• Support for restricting public sector final salary schemes – the

Hutton Report

• Health and Social Care Act has firmly pushed the NHS back in the

political spotlight


The Squeeze is on

• Income is rising slower than costs

• QoF income being reduced

• Any uplift in April 2013 to cover rising costs?

• CPI January 2013 – 2.7%

• Result = profit erosion

• Compounded by higher tax / NI / pension

• Lower net income whilst domestic costs rise too


Inflationary effect

Illustrative GMS practice 2010/11

Gross income (100%) £238k

Costs (58%) £138k

Profit (42%) £100k

Take home pay after tax and superannuation £62k


Effect on take home pay by 2013/14

Illustrative GMS practice

Income + 1% per annum £245k

Costs + 3% per annum £151k

Profit (38%) £94k

Take home pay after tax and superannuation £55k


Overall effect

• Reduction in take home pay over 3 years

o £7k which is 11% of £62k

Reduction 11%

Inflation say 9% cumulative

Erosion in spending power 20%

Excludes effects of higher rate taxes, excess over annual

allowances, withdrawal of child benefit


Changes from 1 April 2013

1. Quality and Outcomes Framework (QOF)

2. Directed Enhanced Services

3. Local Enhanced Services

4. Uprating of investment to GMS contractors

5. Employer superannuation contributions for locums

6. Employee superannuation contribution rates



QOF points changes

Points per domain 2012/13

Domain Points

Clinical 669

Organisational 254

Patient experience 33

Additional services 44

Total 1,000

Points per domain 2013/14

Domain Points

Clinical 610

Quality and Productivity 100

Patient experience 33

Public health 157

Total 900

100 points worth about £15,000

37 points shifted to new clinical areas worth about £5,000

Raising of thresholds expected to cost £11,000

Hence loss to average practice £31,000



QOF threshold changes – 2011/12 example

• Contractor index 1.214

• Achievement 250 out of 289 = 86.5%

• Thresholds in 2011/12 40% to 71%

• Points scored out of 17 17

• Disease prevalence 1.209

• Value of points 1.214 x 17 x 1.209 x £130.51 = £3,256.66

CHD6 The percentage of patients with coronary heart disease in whom the blood pressure reading

(measured in the previous 15 months) is 150/90 or less.



QOF threshold changes – 2013/14 exampleCHD6 The percentage of patients with coronary heart disease in whom the blood pressure

reading (measured in the previous 12 months) is 150/90 or less.



• Directed enhanced services up to £15,000

• Risk profiling and care management for frail older and high risk patients

• Dementia case finding scheme

• Improving on-line patient access to services

• Remote care monitoring for patients with long-term conditions

• Local enhanced services ???

• Kernow Clinical Commissioning Group

• Uprating of investment for GMS contractors 1% ?

• Employer superannuation contribution for locums ???



Luke’s guess at impact on average practice

£

Changes to QOF

Loss of 100 points (15,000)

New clinical indicators (1,000)

Rising thresholds (6,000)

(22,000)

Earned from new DES 10,000

General pay rise 6,000

Reduction in income for average practice £ (6,000)



Luke’s guess at impact on average full-time GP

£

Reduction in income per GP (2,000)

Tax, NI and superannuation saved 1,091

Increased employee superannuation (2,400)

Tax relief on increased superannuation 960

Reduction in take-home pay £ (2,349)


Maximising profits

• Manage your business: Discipline / planning / control

• Before each year:

Identify controllable items: e.g. QOF, enhanced services, wages costs

Identify factors that drive income or expense

Use these to set targets – probably not financial targets in the first instance


Maximising profits

• Identify who is responsible for ensuring targets are achieved, and

when / how they will report to partner group

• SMART targets

• Pre-arranged partners’ meetings – chaired, with targets on agenda


Maximising income

• Assume you are doing the “givens” – e.g. maximising QOF points

• QOF typically about 15% of gross income

• 2011/12 average QOF points 969 = 3.1% lost

• Pay particular attention to disease prevalence indicators

• Exception reporting will become more important in 2013/14


Maximising income

• Use your weekday space effectively – if a GP is not in for 10

sessions per week consider if his / her room has an alternative use

• Rearrange rooms to make minor surgery clinics viable

• Weekend minor surgery / other clinics

• Rent space to alternative health providers (but beware PCT

clawbacks)


Maximising income

• List size per GP is major determinant

• Use your Friends and Patient Participation Group

• “Market” in the community

Articles about local health issues

Profiles on GPs and staff

Do your patients realise you would like more patients, or do you give the

impression of being too busy?


Maximising income

• NHS fees are largely fixed so maximise revenue from non-NHS

work: letters, insurance reports, etc.

• Your reception staff may fail to apply charges unless they can fall

back on a pre-printed tariff (“£X / letter”)


Maximising income

• Understand the criteria for each enhanced service: select those

cost-effective to chase

• Identify one GP specifically to maximise the enhanced services

identified

• Identify likely crunch points (e.g. X date for Y% of childhood

immunisations) and identify nominated GP or PM to report before

then on achievement / any action required.


Controlling expenses

Typical surgery cost profile:

Staff wages / on-costs 41%

Salaried GPs, locums, drugs, consumables 23%

Other costs mostly fixed 26%

100%


Controlling expenses

• “Other costs mostly fixed” cannot be ignored

• Sourcing effective cleaning, telephone charges, heat and light etc.

are all important

• But not at expense of ignoring largest costs:

People


Controlling expenses - staff

• Pay reviews

• Benchmarking

• Flexible working – T.O.I.L. not overtime

• Multi-tasking e.g. reception

• “Squeezing” hours e.g. some staff may prefer 35 hours per week

• Budget and monitor


Controlling expenses –

Salaried GPs and locums

• Budget / monitor

• Set budget before financial year – GP partners’ holidays = locum

requirements

• Monthly report to partners, current + cumulative


Management accounts

• Historically limited uptake in GP practices

• Understandably so for smaller practices

• Just as useful to monitor and report on “controllables” – QOF,

enhanced services, staff and salaried GP / locum costs – the profits

and cash will follow


Profit forecasts, drawings and cash flow

• In theory, profit forecast prepared each year for superannuation

payments on account

• But simplistic since retro-corrected

• Financial pressures now mean drawings and cash flows deserve

more attention

• For many practices drawings will need to reduce – not least

because of increased superannuation contributions


Practice financing

• Loans v Overdrafts

Rates including arrangement fees

Flexibility

Sustainablility

Personal loans v practice loans

Rates

One size (doesn’t?) fit all

Fixed v Variable rates


Profit maximisation

• Profits and drawings under pressure

• Set targets and monitor

• Clear responsibilities: SMART

• Concentrate on controllables

• Targets may be non-financial, but must be regularly and formally

monitored


Lunch


NHS Pension Scheme –

Impact of Changes

• 1995 v 2008 sections

• Annual allowance

• Lifetime allowance

• Increasing contribution rates

• Hutton report

• National Employment Savings Trust


NHS Pension Choice

1995 Section 2008 Section

Normal retirement age 60 65

Benefits 1.4% earnings plus lump

sum

1.87% earnings minus

lump sum

Survivor pension 50% 37.5%


NHS Pension Choice

1995 Section 2008 Section

Lump sum Normally 3 x pension Minimum 4.2% of earnings

up to 31/03/2008

Maximum 5.36 x pension Maximum 4.28 x pension

Added years contributions Continue Cease but benefit to date

transferred


Restriction of Tax Relief –

Annual Allowance

• £50,000 maximum

• Reducing to £40,000 from 2004/05

• Special rules for defined benefit schemes

• Measured against growth in benefits

• 16 x growth in pension + growth in lump sum



Annual Allowance

Simplified example (member of 1995 Section)

Career earnings at 31 March 2011 £2,000,000

“Regulation 72 fraction”

Years in NHS pension scheme 20 1.250

Years as a GP 16

Pension = 1.4% of career earnings x Reg 72 fraction

1.4% x £2,000,000 x 1.250 £35,000

Increase by CPI (September 2010) 3.1% £36,085

Establish position at 31 March 2011



Annual Allowance



Dynamisation factor for 2012 (CPI to Sep 11: 5.2% + 1.5%) 6.7% £134,000

Pensionable earnings in 2011/12 £110,000


“Regulation 72 fraction”

Years in NHS pension scheme 21 1.235

Years as a GP 17

Pension = 1.4% of career earnings x Reg 72 fraction

1.4% x £2,244,000 x 1.235 £38,808

Establish position at 31 March 2012



Annual Allowance


Value of pension at 31 March 2012 £38,808

Value of pension at 31 March 2011 (after allowance for inflation) £36,085

Growth in pension in year £2,723

Growth in lump sum in year (3 x pension) £8,169

Annual pension input = 16 x pension growth + lump sum growth

16 x £2,723 + £8,169 £51,737

Excess over annual allowance taxed at marginal rate

£1,737 x 40%? £695

Annual pension input (growth in benefits)



Annual Allowance

• Unused relief from previous three years can be carried forward

• Added years contracts complicate calculations and increase

pension growth

• Private pension contributions to be factored in

• NHS Pensions required to calculate figures for 2011/12 and

2012/13 by October 2013

• Self assessment tax return for 2011/12 was due January 2013!



Annual Allowance

Likelihood of being affected when annual allowance £50,000


Restriction of tax relief –

Lifetime allowance

• Lifetime pension savings limit reduced from £1.8 million to £1.5

million on 6 April 2012

• Further reduction to £1.25 million planned for 6 April 2014

• Calculation based on 20 x pension + lump sum (+ value of any

private pension funds)

• Option to elect for fixed protection

Maintains lifetime allowance at £1.5 million

No contributions after 5 April 2014

Election must be made by 5 April 2014



Lifetime allowance

Example for member of 1995 Section £

Career earnings at retirement £4.7 million

Pension: 1.4% of career earnings £65,800

Multiply by factor of 20 1,316,000

Lump sum (3 x pension) 197,400

Value of pension 1,513,400

For retirement between 6 April 2012

and 5 April 2014 charge on excess

over £1.5 million

£13,400 x 25% £3,350

Pension reduced by 1/20th of lifetime allowance charge

Pension therefore reduced from £65,800 to £65,632



Lifetime allowance

Benefit of extra year’s membership If lifetime

allowance

not exceeded

If lifetime

allowance

exceeded

£ £

Pensionable pay 100,000 100,000

Employer’s and employee’s contributions 27,500 27,500

Tax relief (40%) (11,000) (11,000)

Increased lump sum (4,200) (4,200)

Net cost 12,300 12,300

Annual pension 1,400 1,400

Lifetime allowance charge - (403)

Tax (40%) (560) (399)

Net benefit 840 598

Effective annuity rate 6.83% 4.86%


Increasing employee contribution rates

2011/12 2012/13 2013/14 2014/15 (possible)

Up to £15k 5.0% 5.0% 5.0% 5.0%

£15k to £21k 6.5% 5.0% 5.3% 5.3%

£21k to £27k 6.5% 6.5% 6.8% 6.8%

£27k to £49k 6.5% 8.0% 9.0% 9.75%

£49k to £70k 6.5% 8.9% 11.3% 12.5%

£70k to £110k 7.5% 9.9% 12.3% 13.5%

£110k and over 8.5% 10.9% 13.3% 14.5%


Reduced monthly drawings from

April 2013?

Pensionable profit Before tax After tax

£60,000 £120 £72

£80,000 £160 £96

£100,000 £200 £120

£120,000 £240 £144

£140,000 £280 £168


Hutton Report

• Link normal pension age to state pension age

• Final salary schemes replaced by career average earnings

schemes

• Implement changes by 2015


Government offer

• New scheme from 1 April 2015

• Those within 10 years of retirement at 1 April 2012 stay in existing

scheme

• Date of joining new scheme delayed for those between 10 and 13.5

years of retirement at 1 April 2012


Protection

Age at 1 April 2012

(if member of 1995

scheme)

Switch to new

scheme

<46.5 1 April 2015

47 1 April 2016

47.5 1 April 2017

48 1 April 2018

48.5 1 April 2019

49 1 April 2020

49.5 1 April 2021

50 N/A


New NHS Pension Scheme

• Career earnings for all members (GPs already on career earnings)

• Dynamisation continues at inflation + 1.5%

Inflation equals CPI?

Normal pension age linked to state pension age

State pension age = 67 or 68?


Protection for accrued benefits

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

45 46 47 48 49 50

Age at 1 April 2012

Value of new scheme compared with 1995 Section

Assumes member joined scheme at 25 and retires at 60


Accountancy/Tax advice IFA advice

Annual allowance calculation Stop paying into NHS Scheme?

Lifetime allowance calculation Take early retirement?

Prediction of NHS pension Elect for fixed protection?


National Employment Savings Trust

• All employers compelled to offer either a Qualifying Workplace

Pension Scheme (e.g. NHS) or NEST

• Will affect non-NHS employing bodies

• Employer contribution 3% to 4%

• Employee contribution 3% to 4%

• Opt-out option for employee

• Phased introduction up to 2017


NHS Pension

(average earnings £100,000 per annum)

Lifetime

contributions

Retirement

age

Pension Lump sum

£ £ £

1995 Section 752,500 60 45,573 188,125

2008 Section 860,000 65 56,883 215,000

New scheme? 1,182,500 68 55,775 295,625


NHS Pension Personal Pension

(average earnings £100,000 per annum)

Lifetime

contributions

Retirement

age

Pension Lump sum

£ £ £

1995 Section 752,500 60 45,573 188,125

14,742

2008 Section 860,000 65 56,883 215,000

20,711

New scheme? 1,182,500 68 55,775 295,625

32,086


Tax Planning

• Impact of tax / NIC thresholds

• Incorporation

• Income shifting

• Capital allowances

• Tax efficient investments

• CGT planning


Tax / NIC thresholds for the

self-employed

• 2013/14 thresholds for tax and NIC largely aligned

Income from

/ to

Tax rate NIC Combined

£9,205 0% 0% 0%

£41,450 20% 9% 29%

£100,000 40% 2% 42%

£118,410 60%* 2% 62%

£150,000 40% 2% 42%

£150,000 + 45% 2% 47%


Income tax rates 2013/14

0%

10%

20%

30%

40%

50%

60%

70%

£9,205 £41,450 £100,000 £118,410 £150,000 £200,000

Effective marginal tax rate (%)


Tax rates

• The tax / NIC at 62% is not an “official rate”

• It is the effect of withdrawing £1 personal allowance for every £2

earned over £100k

• Given GP average earnings, it sits in a real problem bracket

• And at a level where pension planning can become more restricted


Net retained earnings 2014/15

• £100 additional gross

• Assume marginal NIC 2%

• Superannuation 27.5%

• Assume marginal tax rate 40%

• Net retained earnings £43.53

• At the 60% marginal rate the net is £28.35

• BUT Superannuation is “invested” not lost


Incorporation

• For some non-GPs, incorporation offers potential to convert some

income into CGT (effective rate 10% or less); and the rest taxable

under Corporation Tax at 20% - 30%

• Sale of NHS goodwill illegal so CGT advantage – for NHS work –

disappears

• But leaves potential CGT savings on non-NHS work and income

tax savings on all


Incorporation

• Key to potential savings are:

Whether higher rate taxpayer needs to draw the company’s profits

Or can allow a fellow lower-rate taxed shareholder to take

dividends

Whilst ensuring the costs of setting up and running the company do

not outweigh the benefits

With an eye on superannuation


Incorporation

• For main GP practice

GMS contracts cannot involve limited company

PMS / APMS can in certain circumstances – but cannot just

introduce

Introducing may mean PCT has to retender contract


Incorporation

• For certain areas of work incorporation can still be worthwhile – but

individual circumstances


Income shifting

• HMRC has attempted to legislate against “income shifting”

• At its simplest, creating structures enabling income of one

individual to be taxed on another

• Such as limited company with GP and lower earning spouse

• HMRC unsuccessful so far


Capital Allowances

Tax allowances in respect of (e.g)

Equipment (BP monitors, computers)

Vehicles (GPs’ cars)

“Integral features”


Capital Allowances

• In accounts, buy equipment and write down (“depreciate”) over

useful lives

• In tax return, HMRC rules may allow faster or slower claim back

against tax

• One of reasons why accounts profit figure differs from tax returns


Annual Investment Allowance “AIA”

• Currently capped at £250k p.a.

• But 95% of UK businesses invest less than £250k p.a.

• Enables all tax relief to be gained “up front”

• Excludes cars

• Note effect on GP partners joining/leaving


Writing Down Allowance 2013/14 - cars

• All following rates multiplied by % business use

• Note effect on Vehicle Excise Duty too

Emission (grams/km) Allowance rate Example

<95 100% Fiat 500C

>95, <130 18% Ford Focus 2.0TDCi

>130 8% BMW 325D


Integral features

• Electrical wiring

• Cold water systems

• Heating/air conditioning

• Lifts

Not all of these previously qualified – so scope to re-open purchase of

surgery and retrospectively identify/claim back tax


Tax efficient investments

• Restrictions on pensions relief for some higher earners /

contributors

• ISAs – income not taxed in receipt but no relief on investment itself

• EISs

• VCTs


Individual Savings Accounts “ISAs”

• Income not taxed in receipt* but no relief on investment itself

• No CGT on sale

• 2012/13 limit £11,280 of which up to half can be in cash ISA

* Except 10% dividend tax credit not reclaimed


Venture Capital Trusts “VCTs”

• Government encouraging investment in fledgling businesses

• Hence higher risk

• Though many “planned exit” VCTs that concentrate on the tax

returns rather than the trade itself

• 30% tax relief going in

• No income tax, no CGT


Enterprise Investment Schemes “EISs”

• Higher risk, illiquid

• Need to stay invested in trading EIS for 3 years to get benefits

below

• Can use to defer CGT on earlier gain

• 30% income tax relief, no CGT


Seed Enterprise Investment Schemes

“SEISs”

• Smaller companies (assets < £200k, employees < 25)

• Full CGT reinvestment relief in 2012/13

• New qualifying trade – not investment or property

• 50% income tax relief (max £100k investment)

• CGT exempt if held for 3 years


CGT planning

• CGT annual allowance 2012/13 £10,600

• Transfers between spouses up to / including year of separation

CGT free

• So approx. £22k gains p.a. tax free

• Capital Gains form “top slice” and CGT payable at 18% for basic

rate income tax payers, 28% for higher rate


Entrepreneurs relief

• Reduces CGT payable to 10% effective rate (still get annual

allowances)

• Available against gains in assets used in proprietor’s business

(most commonly for GPs – surgery premises)

• Also for shares: shareholder with at least 5% of equity, employed

or company officer at least one year


CGT on sale of share in premises

• CGT payable on excess of sale proceeds over costs

• Costs may represent an amalgamation over years of various

tranches bought / sold

• Relief for any costs of sale – legal, valuation

• No allowance for “indexation” (i.e. general increase in prices since

purchased)


CGT on sale of share in property

• Payable in Jan following tax year of sale

• If sale can be split, can use more than one annual allowance

• Normally no Entrepreneurs Relief if rent has been received for use

of building

• HMRC not taken point re notional rent

• ER – need to sell within 3 years associated with material disposal

of business interests


Summary – tax planning

• Pensions relief useful for higher rate earners but care needed re

AA / LTA

• Penal rates of tax / NIC for earnings £100k to £118k

• Incorporation can work – but individual circumstances

• ISAs, VCTs, EISs

• CGT on property ownership


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Disclaimer & copyright

Luke Bennett

[email protected]

01872 276477

Stuart Cowen

[email protected]

01752 301010

practice management feb 2013

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times of income constraint12

funding changes